Income surged in December, amid fiscal cliff fears

January 31, 2013: 11:09 AM ET
NEW YORK (CNNMoney)

Income and savings surged in December but the effect is probably temporary, due mostly to Americans trying to avoid paying higher taxes in the new year.

Personal income rose 2.6%, the biggest one-month gain since December 2004, the Commerce Department said Thursday.

Americans decided to sock away that extra income more than spend it. While consumer spending ticked up only 0.2%, the personal savings rate rose dramatically. On average, people saved about 6.5% of their disposable income in December, up from 4.1% in November. That's the highest saving rate since May 2009.

The dramatic one-month gain was partly due to companies bringing dividend and bonus payments forward to avoid paying higher individual taxes in 2013, the Commerce Department said.

Lump-sum payments of Social Security benefits and a recovery from Superstorm Sandy also had a small impact.

Excluding those factors, the Commerce Department estimates that disposable income increased only 0.4% in December.

Economists expect the personal income, spending and savings figures to drop in January, as they come off this temporary surge and reflect the expiration of the payroll tax cut.

"The extra strength will be offset by extra weakness in January," said Jim O'Sullivan, chief U.S. economist for High Frequency Economics, in a note to clients.

Related: A couple's 5-year plan to pay off $93,600 in debt

For middle class Americans, there was no escaping higher taxes in 2013. The expiring payroll tax cut means workers have to pay 2% more in taxes this year.

That drop in income in January has already weighed on consumer confidence. The Conference Board announced Tuesday that its Consumer Confidence Index recently fell to its lowest level in 14 months, largely reflecting a weak economic outlook and the payroll tax cut.

"Consumers are more pessimistic about the economic outlook and, in particular, their financial situation," said Lynn Franco, director of economic indicators at the Conference Board, in a statement. "The increase in the payroll tax has undoubtedly dampened consumers' spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock."

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